Down But Not Out
After lingering pandemic issues, rising inflation, the war in Ukraine, China lock downs, and unclogged supply-chain bottlenecks, the S&P 500 was knocked down hard last year, but don’t count it out. History suggests that the stock market could be getting back up in 2023.
In 1926, the Standard Statistics Company created an index to help measure market movements and it was comprised of only 90 stocks. In 1941, Poor’s Publishing merged with Standard Statistics Company to form Standard and Poor’s. Then, on March 4, 1957, the stock index was expanded to track 500 companies and renamed the S&P 500. Certainly, the companies that make up the S&P 500 Index have changed since 1957. However, it still holds a mix of large-cap growth stocks and value stocks that covers all of the sectors in the market. Henceforth, it is one of the most commonly followed equity indices and is often considered as the benchmark for the U.S. stock market.
In 2022, the S&P 500 was knocked down by 19.4%, its fourth worst performance since it was expanded in 1957. Since 1957, the only years that the S&P 500 was knocked down worse than it was in 2022 were 1974, 2002, and 2008. Like 2022, those years were hit hard by heavy economic punches.
In 1974, the oil crisis and inflation rates that reached more than 11% beat on the S&P 500 causing it to fall about 29%. In 2002, the dot-com bubble burst t causing the S&P 500 to drop about 23%. Finally, in 2008, the U.S. housing market crashed and a global financial crisis ensued which caused the S&P 500 to stagger down 38.5%.
In each of these instances, the S&P 500 index rose back to its feet the very next year after its debacle. Even more impressive, the S&P 500 boasted an average return of about 27% in years 1975, 2003, and 2009.
Additionally, since the S&P 500 expansion in 1957 there have only been two occurrences in which the index dropped for more than two consecutive years. In 1973 and 1974, it posted back-to-back declines, and it posted three straight losses from 2000 to 2002. The first of the consecutive losses that occurred in 1973 and 1974 is specifically notable because inflation began to tick up in 1973 and reached its height at just over 12% in 1974. Then the S&P 500 dramatically recovered in 1975, returning over 31%. Fast forward to 2021. Inflation began to tick up in 2021 and it reached its height in 2022 at just above 9%. If history is repeating, 2023 could be poised for an S&P 500 rally.
Understandably, this could be nothing short of pure coincidence. The parallels between 1974 and 2022 are few and every stock market slump and subsequent rally are created from its own unique set of economic data and world events. Furthermore, past performance is NEVER a predictor of future returns. Also, the challenges facing the markets in 2023 are worthy opponents. Consumer confidence is beginning to weaken, corporate earnings are expected to decline, many business leaders in the U.S. have almost no experience navigating high inflation, and the Fed, which was late to the inflation party is now tasked with navigating a soft economic landing as it assesses when to stop this aggressive rate hiking cycle. Not to mention, many strategists are forecasting a short to moderate recession in 2023.
However, the point is that the S&P 500 has ultimately gotten back up after each time it has been knocked down. There isn’t any reason to count the index out. Remain invested and stay in the fight. Do not get caught betting against this champion index when it is ready to return to glory. First State Trust Company has many partners whose investment management and financial planning expertise can assist in these volatile times. For additional information or help finding the partner that is right for you, feel free to contact me at firstname.lastname@example.org.
Michael A. Burns, MBA
Assistant Vice President / Investment Officer
Investing is not risk free and there are no guarantees. You should carefully consider your risk tolerance, time horizon, and financial objectives before making investment decisions. By investing, you run the risk of losing money or losing buying power (where your money does not grow as fast as the cost of living). Risk can be classified into many different categories, and by knowing those categories you can better manage expectations and avoid or reduce certain kinds of risk.
The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only. FSTC does not offer tax, legal, or investment advice, professional counsel should be sought for tax or legal advice.